Share Scheme Tax Comparisons
USOP versus EMI: What's the difference?
Unless specific tax rules apply, any share-based benefit passing from an employer to an employee will habitually be subject to income tax and possibly also to national insurance contributions (NICs). It is usual for the employers NIC to be passed to the employee. Costs can begin to total up dramatically for additional rate taxpayers (additional rate of tax is 45% for 2013/14). This means a large part of your potential gain is swallowed up. This type of plan is more commonly identified as an Unapproved Share Option Plan (USOP).
As this approach is tax inefficient, companies will normally seek to make use of one or more of the government sponsored schemes, under which gains are normally taxed at the more favourable capital gains tax rates.
One of the most popular government sponsored schemes is the Enterprise Management Incentive (EMI). The EMI is a highly tax-efficient method for providing targeted incentives to key employees or employee groups. Participant tax for EMI schemes is 18% for lower rate taxpayers, or 28% for higher rate taxpayers. It is structured as an option scheme, whereby the employee is granted the right to purchase company shares in the future at a price set at the date of grant. The employee gains when the value of the shares rises above the purchase price and value is usually realised on an event i.e. sale of the Company.
The difference between an EMI scheme and a USOP are colossal when considering the tax implications, but the possibility of saving more of your gains does not end there. Due to the 2013 changes involving the legislation interaction of EMI option exercise with availability of CGT Entrepreneurs' Relief, participants may, depending on when they exercise their options and when they sell the shares, now be looking at an astonishingly low effective rate of tax of just 10% regardless of the size of their equity interest.
Previously, the criteria needed to qualify to establish eligibility for Entrepreneurs' Relief included holding 5% of the share capital that equated to 5% of the voting capital (i.e. shares had to carry voting rights), and the participant must have held the shares (rather than the options) for at least 1 year prior to sale. Now, provided the legislation is enacted next year as currently proposed, you no longer have to hold any defined amount of equity, nor voting shares and the only requirement to qualify for Entrepreneurs' Relief in relation to shares acquired pursuant to the exercise of an EMI options is that the participant must still hold the held shares for a year prior to sale.
It appears there has never been a better time to consider an EMI scheme or to take a renewed look at an existing plan. If you would like more information about the benefits of share schemes, including EMI, please call us on 020 8949 5522.